Debt problems

In the financial sphere debt problems are usually connected to the inability of a subject to pay off their debt. Such issues derive from the fact that certain monetary obligations have not been made in time, and the deadline date has already passed. In this case the invoices becomes overdue and the subject- a debtor. These defaults are also well-known as bad debts. When a late payment appears, a debt collection agency is usually hired to solve the issues with outstanding and past-due payments. Debt problems can origin from consumer’s financial difficulties to cover the debt repayment conditions or from his unwillingness to pay. In both cases he will be contacted either by the creditor or by the debt collection agency, representing the lender, and will be informed of his obligations towards the first-party creditor.

Impact of bad debt problems

Failure to repay the outstanding amount (also known as “debt issues”) can cause negative implications for the debtor as late payments are considered as a breach of the contract signed by both sides (first party- creditor, and second party- client or in case of an outstanding payment- debtor). The consequences for not paying an amount due are as following:

Effect on the credit report: A late payment may affect the subject’s credit report. The payment history along with old debts/overdue payments, etc. is the actual subject’s inputs. This is the base on which the overall credit score is calculated and it remains as a permanent record. A bad credit report determines future credit difficulties.

Rise of the interest rate for the increased risk of possible future delayed or non-payments

Additional charges: Unless the subject has a grace period and is still within it, there will be late fees and additional charges may apply. All this will be included in the debtor’s credit record and it will severely reflect one’s net billing statement.

Credit score decrease: When a debtor has a late payment, his credit score will drop. The payment history is part of the credit score and an old debt can drastically decrease it. Depending on the country, an old debt can stay on the debtor’s credit report for seven years. This will affect the debtor’s future purchases.

Penalties can be fixed and monthly, calculated on the base of the overdue period that has passed. Interest penalty can also be included; its amount depends on the amount of the debt. Deadlines for paying an overdue invoice amount vary depending on the country. They are usually due 3 or 6 months from the date of the first reminder letter. In UK, for example, the penalties are regulated by the Late Payment of Commercial Debts (Interest) Act from 1998 and Late Payment of Commercial Debts Regulations 2002 (http://www.berr.gov.uk/files/file37581.pdf).

Possible third party interference as a result of debt problems: If the subject is already in debt, there is a big possibility that the company seeks professional help from a debt collection agency. In this case the debtor is be law-forced to pay his commission fees as well (e.g. GSA, check the Insolvency Law of Switzerland).

If a subject refuses to pay his/her debt, this may lead to debt compliance actions, which are regarded to be part of tax law- “legal measures taken to ensure that borrowers repay their debts”(definition quoted from BusinessDictionary.com, ext. link 4). The compliance actions can include a legal lien placed on the debtor’s property or possessed goods.

Debt problems- origins

There are different reasons regarding why people fall behind with their payments, debt problems and defaulted amounts.

Inoffensive misunderstanding, where the debtors are sure they have paid the amount due within terms and the payment is considered to be made on time. Usually, when the reminder letter arrives this type of debtors settle the debt right away and the problem is easily solved.

Not convinced in the existence of the debt- the customer does not believe such overdue invoice exists and he denies to pay OR the debtor doesn’t believe he will really be charged for the bad debt

Lack of communication- invoice sent to a wrong email/postal address, etc. and the debtor never received the reminder

Actual inability to pay, where the debtor doesn’t have sufficient funds in order to settle the debt. In such cases he either starts negotiations with the debt collection agency for paying the amount on a monthly basis or states an insolvency payment claim. This debt problem can origin from a reduced income where the debtor’s expenses exceed his income (also known as “deficit spending”) OR from abrupt expenditures, e.g. sudden unemployment/medical expenses.